19 Dec 2019
CMB International Securities | Equity Research | Company Initiation
Perfect World (002624 CH)
Game leader with valuable IPs BUY (Initiation)
Target Price RMB48.9 Up/Downside +19.3% We expect Perfect World (“PW”) to keep its solid game momentum and see Current Price RMB41.0 potential entertainment recovery, backed by valuable IPs, strong development team and high-quality productions. We forecast PW to deliver 11%/17% revenue/earnings CAGR during FY18-21E. Initiate with BUY with DCF-based TP RMB49. China Internet Sector
Sophie Huang A leading game & entertainment player with valuable IPs. As a PC game (852) 3900 0889 pioneer, PW successfully transferred its strategic focus on mobile games, and [email protected] developed notable IP-based titles, such as New Jade Dynasty Mobile (新诛仙) and Perfect World Mobile (完美世界手游). We forecast PW to deliver 11%/17% revenue/earnings CAGR during FY18-21E, thanks to its solid game and Stock Data entertainment pipeline. Mkt Cap (RMB mn) 51,514 Avg 3 mths t/o (RMB mn) 421.2 Game: rich game portfolio to maintain strong momentum. Backed by 52w High/Low (RMB) 41/22.6 valuable IPs and strong development team, PW had rich game pipeline in Total Issued Shares (mn) 1,293 2H19E, including New Swordsman Mobile (新笑傲江湖), Nightmare, New Source: Bloomberg
Forsaken World (新神魔大陆), etc. We expect its rich game pipeline will Shareholding Structure continuously boost ongoing growth in 2020E, supported by stepping-up new Perfect World 35.1% games introduction and launch. We forecast its game sector to grow 23%/14% DQ JunYang Ent 11.9% Chi Yufeng 10.2% YoY in FY19/20E, in which PC/ mobile games to deliver 5%/39% YoY growth Source: Bloomberg in FY19E. Share Performance Entertainment: more high-quality productions to come. Film industry in Absolute Relative China faces multiple challenges in 2019, including flat industrial growth and 1-mth 32.1% 28.4% tightening regulations on celebrity, content and pipeline. Given recent film 3-mth 35.3% 34.3% 6-mth 62.3% 48.8% headwinds, we expect PW’s entertainment segment to bear pressure in Source: Bloomberg FY19E, but keep positive on it recovery in FY20E, supported by its strong pipeline with high-quality TV dramas and movies. 12-mth Price Performance (RMB) Initiate with BUY. We initiate BUY with DCF-based TP of RMB49, implying 45 002624 CH SHSZ300 (rebased) 26.7x P/E in FY20E. We think the majority of PW’s solid FY19E financials 40 have been partly priced in, and PW’s positive price drivers and catalysts 35 30 originate from: 1) further performance of new games; and 2) stepping-up 25 contribution from entertainment after regulation headwinds. 20 15 10 Earnings Summary Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 (YE 31 Dec) FY17A FY18A FY19E FY20E FY21E Revenue (RMB mn) 7,930 8,034 8,651 9,945 11,056 Source: Bloomberg YoY growth (%) 28.8 1.3 7.7 15.0 11.2 Net income (RMB mn) 1,505 1,706 2,086 2,410 2,719 EPS (RMB) 1.14 1.30 1.59 1.83 2.07 YoY growth (%) 29.0 13.4 22.3 15.5 12.8 P/E (x) 35.8 31.6 25.8 22.4 19.8 P/S (x) 6.8 6.7 6.2 5.4 4.9 Yield (%) 0.4 0.4 0.5 0.6 0.7 ROE (%) 17.5 20.2 18.7 18.5 17.6 Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3 ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 19 Dec 2019
Investment Summary Widely-anticipated IP reserve to deliver ongoing pipeline Leveraging valuable PC IPs to boost mobile momentum We see high visibility for PW to continue develop high quality and selective hot titles, backed by its valuable PC IP reserve. Since 2013, PW has begun to transfer its strategic focus on mobile games from PC games, and successfully developed notable PC IP-based titles, such as New Jade Dynasty Mobile <新诛仙>, Perfect World Mobile <完美世界手游>， and Return of the Condor Heroes 2 <神雕侠侣 2>. Moreover, most of its hot titles have long lifecycle.
Figure 1: PW’s key titles
Source: Company, CMBIS
Figure 2: PW’s PC game in operation No Title Chinese Title Type Launch Date 1 Jade Dynasty 3 诛仙3 MMORPG 2007 2 PW International 完美国际 MMORPG 2006 3 Swordsman 笑傲江湖 OL MMORPG 2013 4 My Own Swordsman 武林外传 MMORPG 2006 5 Forsaken World 2 神魔大陆 2 MMORPG 2013 6 Fantasy Jade Dynasty 2 梦幻诛仙 2 MMORPG 2009 7 Redcliffe 赤壁 MMORPG 2008 8 Creation chariots 创世战车 FTG 2019 9 The Mummy 神鬼传奇 MMORPG 2009 10 War of the Immortals 神鬼世界 MMORPG 2010 11 Perfect World 完美世界 MMORPG 2005 12 Condor Heroes 神雕侠侣 MMORPG 2012 13 Dance party MAX 热舞派对 MAX Social Casual 2008 14 Pocketpet Journey West 口袋西游 MMORPG 2008 15 CS:GO CS:GO RTS 2012 16 DOTA 2 DOTA 2 MOBA 2013 Source: Company data, CMBIS
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19 Dec 2019
Figure 3: PW’s mobile game in operation No Title Chinese Title Type Grossing Rank Launch Date 1 Jade Dynasty Mobile 诛仙手游 MMORPG 4 2016.09 2 Perfect World Mobile 完美世界手游 MMORPG 1 2019.03 3 My Own Swordsman Mobile 武林外传官方手游 MMORPG 3 2018.05 4 Condor Heroes 2 神雕侠侣2 手游 MMORPG 6 2019.07 5 Reincarnation 轮回诀 RPG 30 2018.04 6 Feng Long Zhan Ji 封龙战纪 MMORPG 63 2019.01 7 The Legend of The Condor Heroes Mobile 射雕英雄传手游 MMORPG 5 2017.06 8 The Legend of The Condor Heroes 3D 射雕英雄传 3D MMORPG 9 2016.03 9 Dream book 梦间集 Simulation 61 2017.07 10 Torchlight 火炬之光 MMORPG 66 2016.12 11 Final Fantasy Awakening 最终幻想 · 觉醒 MMORPG 5 2016.12 12 Heavenly Sword Dragon Slaying Saber 倚天屠龙记 MMORPG 8 2016.05 13 Legend of Condor Hero Mobile 神雕侠侣手游 MMORPG 11 2015.01 14 The Flame's Daughter 烈火如歌 MMORPG 26 2018.04 15 My Origin 我的起源 Sandbox 48 2019.11 16 Yun Meng Si Shi Ge 云梦四时歌 RPG 6 2019.05 Source: Company data, App Annie, CMBIS
Flagship of
Figure 4: iOS grossing rank of
Source: App Annie, CMBIS
Not only MMORPG, but more… We expect PW’s game category expansion to enrich its game portfolio and deliver ongoing contribution. PW had rich experience in MMORPG games development. Apart from MMORPG, PW continuously explores diversified game types, such as SLG, CCG, female- oriented games. For instance,
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19 Dec 2019
Stepping up game development to maximize IP monetization We believe PW’s solid R&D team and stepping-up investment play key role in well-known game development. In 2018, PW had a R&D team with 2,823 developers, accounting for 66% of total employees. Moreover, its R&D/rev ratio were around 25% in the past three years, higher than industrial average (18%).
Figure 5: PW’s R&D team Figure 6: R&D expenses
2900 70% 1.6 （RMB bn） 35%
1.4 2800 60% 30% 1.2 50% 25% 2700 1 40% 20% 2600 0.8 30% 15% 0.6 2500 20% 10% 0.4 2400 10% 0.2 5%
2300 0% 0 0% 2016 2017 2018 2016 2017 2018 1H18 1H19 No. of R&D employees As of total employees R&D expenses % of total revenue Source: Company data, CMBIS Source: Company data, CMBIS
Rich game portfolio with great monetization potential Backed by valuable IPs and strong development team, PW had rich game pipeline in 2H19E, including New Swordsman Mobile (新笑傲江湖), Nightmare, etc. PC games also see strong titles in pipeline, including New Fantasy Zhuxian (新诛仙世界), Perfect World (完美世界主机版). etc. We expect its rich game pipeline will continue boost ongoing growth in 2020E, supported by stepping-up new games introduction and launch (e.g. New Forsaken World (新神魔大陆), Meng Jian Ji Tian'e Zuo(梦间集天鹅座), New Fantasy Zhuxian(梦幻新诛仙)).
Mobile games to maintain strong momentum We are bullish on PW’s mobile game revenue growth in FY19E. We forecast its mobile games to grow 39% YoY in FY19E, given its strong pipeline and newly-launched hot titles. In particular, we expect Perfect World Mobile ( 完美世界手游) and Zhuxian(诛仙) to contribute revenue significantly (accounting for 48% of total mobile game revenue in FY19E), due to 1) their high quality graphic effects, 2) innovative features based on its profound understanding of players, and 3) reputable IP and cooperation with Tencent.
Figure 7: PW’s game revenue estimate Figure 8: PW’s mobile game revenue estimate
9000 (RMB mn) 30% 6000 (RMB mn) 50%
8000 25% 5000 40% 7000 20% 30% 6000 4000 15% 5000 20% 10% 3000 4000 10% 5% 3000 2000 0% 0% 2000 1000 -10% 1000 -5%
0 -10% 0 -20% FY16 FY17 FY18 FY19E FY20E FY21E FY16 FY17 FY18 FY19E FY20E FY21E Game re venue YoY Mobile game YoY Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates
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19 Dec 2019
In 4Q19, ReEvolve (我的起源), a sandbox game distributed by Tencent, performed well after launch, with iOS grossing rank at ~30 in game category. New Swordsman Mobile (新 笑傲江湖) will also be launched in Dec 2019. We expect these new games to contribute 6%/17% of total revenue in FY19/20E.
Figure 9: ReEvolve (我的起源) grossing rank Figure 10: ReEvolve (我的起源)
Source: App Annie, CMBIS Source: Company, CMBIS
PC games outperformed despite industrial decline Although PC games step into declining stage, PW’s PC games still deliver solid growth in FY19E. We forecast its PC games to grow 5% YoY in FY19E, largely higher than industrial average. Among the new PC games to be launched, we are optimistic on the performance of New Fantasy Zhuxian (新诛仙世界), Perfect World (完美世界主机版).
Figure 11: PC game revenue forecast Figure 12: Perfect World PC version
3000 (RMB mn) 12% 10% 2500 8%
2000 6%
4% 1500 2%
1000 0%
-2% 500 -4%
0 -6% FY16 FY17 FY18 FY19E FY20E FY21E PC game YoY Source: Company data, CMBIS estimate Source: Company, CMBIS
Expecting games to grow at 23% YoY in FY19E. In total, we forecast its game sector to grow 23%/15% YoY in FY19/20E. We think FY19E performance has well acknowledged by the market, and further catalysts will derive from FY20E pipeline.
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19 Dec 2019
Entertainment: solid pipeline with high quality products Film industry in China faces multiple challenges in 2019, including flat industrial growth and tightening regulations on celebrity, content, pipeline. Given recent film headwinds, we expect PW’s entertainment to bear pressure in FY19E, but keep positive on its recovery in FY20E, supported by its strong pipeline with high quality TV dramas and movies.
Notable track record backed by solid team and high quality content By investing in excellent production team and enterprises, PW has built over 10 selective production teams with diversified production style. It will introduce enriched productions catering to all kinds of audience demand. In the past years, PW produced multiple proven successful dramas, like Ashes of Live (香蜜沉沉烬如霜), The Flame's Daughter (烈火如歌) and recent Youth Strive (青春斗). We believe PW could leverage its M&A resources, solid team and content production, to continue deliver well-performed drama series.
Figure 13: The Flame's Daughter (烈火如歌) Figure 14: Playback Rank in Apr 1 2019 14,000
12,000
10,000
8,000
6,000
4,000
2,000
0 青春斗 都挺好 推手 只为遇见你 春暖花又开
Source: Company, CMBIS Source: VLinkage, CMBIS
More high quality productions to come With regulations on film and TV relaxed in 4Q19, we see high visibility for PW to see stepping-up production release and revenue recognized. Looking ahead, there are about 20 TV dramas in pipeline. We believe the upcoming productions will be further catalysts, including New Horizon (壮志高飞), Bu Hun Nv Wang (不婚女王), etc.
Expecting entertainment to recover in FY20E We expect entertainment segment to decline 23% YoY in FY19E, in which solid TV drama to partly offset movies decline. However, we expect its entertainment revenue to rebound in FY20E (forecasting 17% YoY growth), with strong pipeline and upcoming productions release. Meanwhile, we see high visibility for its entertainment segment GPM to recover, for decreasing cost of TV production and celebrity salaries.
Figure 15: Entertainment revenue forecast
3000 (RMB mn) 70% 60% 2500 50% 2000 40% 30% 1500 20% 10% 1000 0% 500 -10% -20% 0 -30% FY16 FY17 FY18 FY19E FY20E FY21E Film & TV YoY Source: Company data, CMBIS estimate
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19 Dec 2019
Figure 16: Solid entertainment pipeline No. Title English Name 1 不婚女王 Bu Hun Nv Wang 2 壮志高飞 Zhuang Zhi Gao Fei 3 半生缘 Eighteen Springs 4 最美的乡村 The most beautiful countryside 5 暴风眼 Storm Eye 6 怪你过分美丽 You're too beautiful 7 冰糖炖雪梨 Bing Tang Dun Xue Li 8 月上重火 Heavy fire 9 全世界最好的你 Best of you 10 江山故人 Jiang Shan Gu Ren 11 新一年又一年 Year After Year 12 大海港 Seaport 19 我在天堂等你 Waiting for you in heaven 14 蓝盔特战队 Blue helmet 15 燃烧 Burning 16 高大霞的火红年代 Gao Daxia's Flaming Age 17 霍元甲 Huo Yuanjia Source: Company, CMBIS
Figure 17: Zhuang Zhi Gao Fei (壮志高飞) Figure 18: Bu Hun Nv Wang (不婚女王)
Source: Company, CMBIS Source: Company, CMBIS
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19 Dec 2019
Financial Analysis Revenue Breakdown We forecast PW’s revenue will grow at 8%/15%/11% YoY in FY19/20/21E, in which game business still devotes most of total revenue. We expect game revenue up to RMB6,636mn in FY19E with a CAGR of 16% in FY18-21E, accounting for 77% of total revenue. The robust growth is mainly driven by solid pipeline of both games and entertainment.
Figure 19: Revenue growth estimates Figure 20: FY19E revenue breakdown 12,000 35% (RMB mn)
10,000 30% Others 0% Film & TV 25% 23% 8,000 20% 6,000 15% 4,000 10% Games 2,000 5% 77%
0 0% FY16 FY17 FY18 FY19E FY20E FY21E Others Games Film & TV YoY growth Source: Company data, CMBIS estimates Source: CMBIS estimates
Figure 21: Revenue breakdown estimates Figure 22: Revenue growth estimates
100% 70% 90% 60% 80% 50% 70% 40% 60% 30% 50% 20% 40% 10% 0% 30% FY17 FY18 FY19E FY20E FY21E 20% -10% -20% 10% -30% 0% FY16 FY17 FY18 FY19E FY20E FY21E Film & TV Games Others Revenue Others Games Film & TV Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates
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19 Dec 2019
Income Statement We expect better margin outlook, and forecast its adj. net profit to grow at 17% CAGR in FY18-21E, mainly driven by 11% revenue CAGR and improving operating margin (28% in FY20E, vs. 24% in FY18).
We expect gross margin to pick up in FY19E, for lower revenue mix from entertainment (with lower GPM). In terms of operating margin, we expect opex ratio to rise in FY19E, but decline from FY20E, for operating leverage. Overall, we expect its adj. net margin up to 24%/24%/25% in FY19/20/21E.
As a result, we forecast its net profit to reach RMB2,086mn in FY19E, with net margin up to 24% in FY19E.
Figure 23: Income statement RMB mn, Dec-YE FY16 FY17 FY18 FY19E FY20E FY21E Revenue 6,159 7,930 8,034 8,651 9,945 11,056 Cost of sales (2,404) (3,381) (3,550) (3,114) (3,852) (4,326) Gross profit 3,755 4,549 4,484 5,537 6,094 6,731 Sales and marketing expenses (755) (744) (880) (887) (970) (1,078) Research and development expenses - - (1,413) (1,665) (1,780) (1,924) General and administrative expenses (1,836) (2,073) (704) (737) (788) (903) Other income 37 (143) 406 182 229 307 Operating (loss)/profit 1,201 1,589 1,892 2,431 2,785 3,132 Non-operating income 157 72 31 30 50 50 Non-operating expenses (2) (13) (7) (7) (7) (7) Profit before taxation 1,356 1,649 1,916 2,453 2,828 3,175 Income tax expense (223) (189) (156) (307) (353) (397) Profit for the year 1,133 1,460 1,759 2,147 2,474 2,778 Non-controlling interests 33 45 (53) (61) (65) (59) Net profit attributable to equity shareholders 1,166 1,505 1,706 2,086 2,410 2,719
Margin Analysis Gross margin 61% 57% 56% 64% 61% 61% Operating margin 20% 20% 24% 28% 28% 28% Net margin 19% 19% 21% 24% 24% 25%
Growth Analysis Revenue 29% 1% 8% 15% 11% Gross profit 21% -1% 23% 10% 10% Operating profit 32% 19% 28% 15% 12% Net profit 29% 13% 22% 16% 13% Source: Company data, CMBIS estimates
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19 Dec 2019
Balance Sheet
Healthy balance sheet with net cash position in FY19/20/21E According to our estimates of profit before taxation and change in working capital, PW has strong operating cash inflow in supporting CAPEX in the next three years. Therefore, we believe PW can stay in net cash position in FY19/20/21E. We expect PW to hold RMB7.2bn/RMB9.4bn cash and cash equivalent as of 31 Dec of 2019E and 2020E.
Figure 24: Balance Sheet RMB mn, Dec-YE FY17 FY18 FY19E FY20E FY21E Non-current assets 6,339 5,195 4,233 3,380 2,562 Fixed asset 491 362 300 238 184 LT investment 3,237 3,452 3,622 3,712 3,802 Intangible assets 114 87 94 98 100 Others 2,496 1,294 217 -668 -1,524
Current assets 10,246 10,783 13,519 16,690 19,978 Cash 3,236 4,229 7,165 9,390 11,998 Prepayment 852 790 693 857 962 Account receivable 1,662 1,964 2,115 2,432 2,703 Others 4,497 3,800 3,547 4,011 4,314
Current liabilities 5,215 3,921 3,992 4,330 4,562 Short-term debt 618 1,270 1,270 1,270 1,270 Customer advances 529 409 441 507 563 Accounts Payable 1,803 1,372 1,204 1,489 1,672 1-year loan 1,106 0 200 200 200 Others 1,160 870 877 864 856
Non-current liabilities 2,552 2,725 2,525 2,325 2,125 Borrowings 500 794 594 394 194 Others 2,052 1,932 1,932 1,932 1,932
MI 823 870 925 983 1,036 Total Equity 8,787 9,309 11,213 13,392 15,829 Shareholders' equity 7,964 8,439 10,288 12,409 14,793 Source: Company data, CMBIS estimates
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19 Dec 2019
Cash Flow and Working Capital
Solid pipeline to ensure strong operating cash flow Leveraging its strong pipeline and margin improvement, we expect PW to maintain its strong operating cash inflow trend and record RMB2,244mn / RMB1,803mn of operating cash inflow in FY19/20E, respectively.
Figure 25: Cash flow and working capital analysis RMB mn, Dec-YE FY17 FY18 FY19E FY20E FY21E Net income 1,505 1,706 2,086 2,410 2,719 D&A 280 166 117 103 105 Change in WC (1,074) (1,261) 59 (630) (468) Others 93 (742) (18) (80) (171) Operating CF 804 (130) 2,244 1,803 2,185
Capex (194) (141) 67 (69) (69) Associates - - - - - Others 1,909 3,117 960 922 886 Investing CF 1,715 2,976 1,027 853 817
Equity raised 2 0 - - - Change of Debts (359) (160) - (200) (200) Others (1,095) (1,793) (336) (231) (194) Financing CF (1,451) (1,952) (336) (431) (394)
Net change in cash 1,032 920 2,936 2,226 2,608 Cash (beg of yr) 1,900 2,931 3,852 6,788 9,013 FX (37) 27 - - - Cash (end of yr) 2,931 3,852 6,788 9,013 11,621 Source: Company data, CMBIS estimates
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19 Dec 2019
Valuation Investment Thesis We initiate BUY with DCF-based TP of RMB49, implying 26.7x FY20E P/E. We think the majority of PW’s solid FY19E financials have been partly priced in, and PW’s positive price drivers and catalysts originate from: 1) further performance of new games, and 2) stepping- up contribution from entertainment after regulation headwinds.
Initiate with BUY We use DCF valuation as our primary method since it is suitable to apply DCF valuation to game companies with healthy cash flows in the long run. Assuming a WACC of 13.9% and a terminal growth rate of 3%, our estimated TP is RMB49, representing 26.7x FY20E P/E, slightly higher than industry average of 23.5x FY20E P/E.
Figure 26: DCF valuation DCF Valuation (RMB mn) 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E EBIT 2,785 3,132 3,915 4,845 5,938 7,211 8,679 10,358 12,261 14,402 Tax (353) (397) (496) (614) (752) (914) (1,100) (1,312) (1,554) (1,825) D&A 103 105 110 113 117 120 124 128 131 135 Change in working capital (630) (468) (374) (300) (240) (192) (153) (123) (98) (79) CAPEX (69) (69) (71) (72) (74) (75) (77) (78) (80) (81) FCF 1,836 2,302 3,084 3,973 4,989 6,150 7,473 8,972 10,661 12,553 Terminal Value 118,928
Assumptions WACC 13.9% Tax rate -12.0% Risk free rate 3.53% Cost of debt 6.0% Beta 1.20 Market risk return 11.4% Cost of equity 14.1% Debt/Assets 2.6% Long term growth 3.0% Debt 0 WACC ~ 12% 13% 14% 15% 16% Equity Value 1.5% 56.1 50.0 45.6 40.8 37.3 PV 58,630 2.0% 57.8 51.3 46.6 41.6 37.9 Terminal minus: Net debt (RMB mn) (5,695) 2.5% 59.6 52.7 47.7 42.4 38.6 growth minus: Minority interest (RMB mn) 0 1 3.0% 61.6 54.2 48.9 43.3 39.3 rate Equity Value (RMB mn) 64,325 3.5% 63.8 55.9 50.2 44.3 40.0 Shares(mn) 1,315 4.0% 66.4 57.7 51.7 45.4 40.9 TP (RMB) 49 4.5% 69.2 59.8 53.3 46.6 41.8 Source: Company data, Bloomberg, CMBIS estimates
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19 Dec 2019
Peers comparison We selected six games comps ((Tencent, NetEase, Kingsoft, Perfect World, Sanqi, Giant)) and four entertainment comps (TME, BILI, IQ, China Literature) as peers, to reflect its business model. Average FY20E P/E of China games and entertainment are 23.5x and 24.0x, respectively. Our DCF-based TP implies multiple of 26.7x FY20E P/E, slightly higher than industry average, for its higher earnings growth and strong pipeline. We believe its solid games and entertainment rebound could be further catalysts.
Figure 27: Peers valuation Company Ticker Mkt.Cap Currency Price P/E P/S EV/EBITDA FY19-21 (USD mn) FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E EPS CAGR Leaders Tencent 700 HK 453,672 HKD 378 33.7 28.0 23.1 8.5 6.8 5.6 24.5 20.1 16.8 21% Alibaba BABA US 555,243 USD 207 Baidu BIDU US 42,685 USD 123 22.6 18.0 13.9 2.8 2.5 2.3 18.6 11.8 10.2 28% JD JD US 50,580 USD 35 35.0 25.4 19.2 0.6 0.5 0.5 22.6 15.7 12.2 35% Meituan 3690 HK 78,109 HKD 103 338.7 79.2 36.8 5.7 4.3 3.4 119.8 51.4 26.7 203% Pinduoduo PDD US 44,960 USD 39 NA 544.7 52.1 10.3 6.2 4.5 NA NA 774.0 NA NetEase NTES US 38,985 USD 305 19.3 18.8 17.1 4.2 4.0 3.6 14.2 12.8 11.7 8% Average 27.8 22.8 18.5 5.7 4.3 3.5 37.1 21.7 123.7 53% Ecommerce Alibaba BABA US 555,243 USD 207 JD JD US 50,580 USD 35 35.0 25.4 19.2 0.6 0.5 0.5 22.6 15.7 12.2 35% Pinduoduo PDD US 44,960 USD 39 NA 544.7 52.1 10.3 6.2 4.5 NA NA 774.0 NA Vipshop VIPS US 9,266 USD 14 14.8 11.9 10.9 0.7 0.7 0.6 10.5 8.3 7.6 16% Babytree 1761 HK 388 HKD 2 NA NA 232.3 5.5 4.5 3.5 NA NA 22.9 NA Average 26.1 20.4 25.4 4.9 3.6 2.8 18.8 14.1 166.3 24% OTA Ctrip TCOM US 20,059 USD 34 25.5 21.2 17.1 3.9 3.5 3.0 24.6 19.4 15.4 22% Tongcheng-elong 780 HK 3,446 HKD 13 17.1 13.6 10.9 3.3 2.7 2.2 10.4 7.7 6.1 24% Tuniu TOUR US 287 USD 2 NA 22.1 11.9 0.9 0.9 0.8 NA NA NA NA Average 21.3 19.0 13.3 2.7 2.3 2.0 17.5 13.5 10.8 3% Game Tencent 700 HK 453,672 HKD 378 33.7 28.0 23.1 8.5 6.8 5.6 24.5 20.1 16.8 21% NetEase NTES US 38,985 USD 305 19.3 18.8 17.1 4.2 4.0 3.6 14.2 12.8 11.7 7% Kingsoft 3888 HK 3,447 HKD 19 NA 71.7 40.7 3.1 2.3 1.8 141.7 28.6 17.6 NA Perfect World 002624 CH 7,406 CNY 41 24.9 21.4 18.7 6.1 5.2 4.6 20.2 17.8 16.0 15% Sanqi Interactive 002555 CH 7,553 CNY 26 25.4 21.9 19.4 4.3 3.7 3.3 19.6 17.1 14.7 14% Giant Interactive 002558 CH 5,177 CNY 18 32.3 27.3 25.6 8.6 7.7 6.9 NA NA NA 12% Average 27.1 23.5 20.8 5.8 5.0 4.3 19.6 17.0 14.8 17% Live streaming MOMO MOMO US 7,554 USD 36 13.0 10.9 9.5 3.1 2.6 2.3 11.3 7.9 6.7 19% YY YY US 4,525 USD 56 14.0 10.4 7.5 1.2 1.0 0.8 9.7 6.6 3.8 38% Inke 3700 HK 272 HKD 1 4.5 2.4 2.4 NA NA NA NA NA NA 38% Huya HUYA US 3,803 USD 17 38.8 22.9 15.4 3.2 2.3 1.9 39.5 16.3 10.5 65% Average 17.6 11.6 8.7 2.5 2.0 1.7 20.2 10.3 7.0 39% Entertainment Tencent Music TME US 18,788 USD 11.5 29.4 23.9 17.9 5.2 4.1 3.2 24.6 18.7 13.6 28% iQiyi IQ US 14,352 USD 19.7 NA NA NA 3.5 3.0 2.5 27.8 16.3 9.0 -48% China Literature 772 HK 4,333 HKD 33.3 29.6 24.2 20.6 4.4 3.8 3.3 17.3 13.5 11.6 21% Bilibili BILI US 5,857 USD 18.0 NA NA 102.6 6.1 4.2 3.2 NA 252.3 29.9 NA Average 29.5 24.0 47.0 4.8 3.8 3.1 23.3 75.2 16.0 0% Ads Baidu BIDU US 42,685 USD 123.2 22.6 18.0 13.9 2.8 2.5 2.3 18.6 11.8 10.2 30% Weibo WB US 10,113 USD 44.9 16.5 15.8 13.8 5.7 5.3 4.7 14.0 12.9 11.3 10% Sina SINA US 2,590 USD 37.3 13.3 13.3 10.7 1.2 1.1 1.0 5.3 4.9 4.1 14% Mobvista 1860 HK 662 HKD 3.4 15.4 9.8 6.4 1.2 1.0 0.8 15.3 8.0 5.5 46% Duiba 1753 HK 646 HKD 4.6 20.2 8.4 5.9 2.3 1.6 1.2 16.8 5.3 3.6 232% 58.com WUBA US 9,299 USD 62.2 16.3 18.8 17.2 4.2 3.7 3.3 17.2 14.8 12.4 0% Average 17.4 14.0 11.3 2.9 2.5 2.2 14.5 9.6 7.8 33% Total Average 20.8 17.3 16.7 4.0 3.3 2.8 23.2 23.3 41.0 29.6% Source: Bloomberg Note: Data updated by 18 Dec 2019
Key Investment Risks Key investment risks might derive from: 1) Uncertainty in regulations; 2) slower-than- expected launch of new games; 3) grossing decline of hot titles; and 4) film headwinds.
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Financial Summary
Income statement Cash flow summary YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E Revenue 7,930 8,034 8,651 9,945 11,056 Net income 1,505 1,706 2,086 2,410 2,719 Film & TV 2,277 2,611 2,015 2,352 2,582 D&A 280 166 117 103 105 Games 5,622 5,389 6,636 7,594 8,475 Change in WC (1,074) (1,261) 59 (630) (468) Others 31 33 33 33 33 Others 93 (742) (18) (80) (171) COGS (3,381) (3,550) (3,114) (3,852) (4,326) Operating CF 804 (130) 2,244 1,803 2,185 Gross profit 4,549 4,484 5,537 6,094 6,731 Capex (194) (141) 67 (69) (69) S&M (744) (880) (887) (970) (1,078) Associates - - - - - Admin.Exp. (2,073) (704) (737) (788) (903) Others 1,909 3,117 960 922 886 R&D - (1,413) (1,665) (1,780) (1,924) Investing CF 1,715 2,976 1,027 853 817 Others (328) (144) (70) 75 160 Operating profit 1,589 1,892 2,431 2,785 3,132 Equity raised 2 0 - - - Change of Debts (359) (160) - (200) (200) Non-operating Rev 72 31 30 50 50 Others (1,095) (1,793) (336) (231) (194) Non-operating Exp (13) (7) (7) (7) (7) Financing CF (1,451) (1,952) (336) (431) (394)
Pre-tax Income 1,649 1,916 2,453 2,828 3,175 Net change in cash 1,032 920 2,936 2,226 2,608 Income Tax (189) (156) (307) (353) (397) Cash (beg of yr) 1,900 2,931 3,852 6,788 9,013 Less: MI 45 (53) (61) (65) (59) FX (37) 27 - - - Net profit 1,505 1,706 2,086 2,410 2,719 Cash (end of yr) 2,931 3,852 6,788 9,013 11,621
Balance sheet Key ratios YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E YE 31 Dec FY17A FY18A FY19E FY20E FY21E Non-current assets 6,339 5,195 4,233 3,380 2,562 Sales mix (%) Fixed asset 491 362 300 238 184 Film & TV 28.7 32.5 23.3 23.6 23.4 LT investment 3,237 3,452 3,622 3,712 3,802 Games 70.9 67.1 76.7 76.4 76.6 Intangible assets 114 87 94 98 100 Others 0.4 0.4 0.4 0.3 0.3 Others 2,496 1,294 217 (668) (1,524) Total 100.0 100.0 100.4 100.3 100.3
Current assets 10,246 10,783 13,519 16,690 19,978 Growth rate (%) Cash 3,236 4,229 7,165 9,390 11,998 Revenue 28.8 1.3 7.7 15.0 11.2 Restricted cash 852 790 693 857 962 Gross profit 21.1 (1.4) 23.5 10.0 10.5 Account receivable 1,662 1,964 2,115 2,432 2,703 EBIT 32.3 19.1 28.5 14.6 12.4 Others 4,497 3,800 3,547 4,011 4,314 Net profit 77.4 22.1 12.6 19.4 13.5
Current liabilities 5,215 3,921 3,992 4,330 4,562 P&L ratios (%) Short-term debt 618 1,270 1,270 1,270 1,270 OPM 20.0 23.6 28.1 28.0 28.3 Customer advances 529 409 441 507 563 Pre-tax margin 20.8 23.8 28.4 28.4 28.7 Accounts Payable 1,803 1,372 1,204 1,489 1,672 Net margin 17.6 21.2 22.2 23.1 23.5
1-year loan 1,106 - 200 200 200 tax rate (2.4) (1.9) (3.5) (3.6) (3.6) Others 1,160 870 877 864 856 Returns (%) Non-current liabilities 2,552 2,725 2,525 2,325 2,125 ROE 17.5 20.2 18.7 18.5 17.6 Borrowings 500 794 594 394 194 ROA 9.1 10.7 11.7 12.0 12.1 Others 2,052 1,932 1,932 1,932 1,932 Per share MI 823 870 925 983 1,036 EPS (RMB) 1.14 1.30 1.59 1.83 2.07 Total Equity 8,787 9,309 11,213 13,392 15,829 DPS (RMB) 0.17 0.18 0.22 0.25 0.29 Shareholders' equity 7,964 8,439 10,288 12,409 14,793 BVPS (RMB) 2.23 2.93 5.16 6.86 8.84 Source: Company data, CMBIS estimates
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OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months
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